COVID-19 is a business factor that cannot be avoided. We find it affecting the industry in the form of landmark deals by Malaysia and the IsDB Group to provide relief. We found it changed how deals were executed. There was that brief pause: can we work from home? Are we putting good money into a bad situation? And, slowly, the Islamic finance market came to the decision that we can do it and it is money soundly invested. Even if there were cutbacks and changes in behavior, the Islamic finance market regained momentum and ended the awful year with a surprising performance.
As much a reflection of the depth and power of the Malaysian Islamic capital market, Malaysian submissions rebounded back to 32% of the total. Saudi Arabia dropped to 15% from 19%. On a dollar volume basis, Saudi’s mega deals would surely lift the Kingdom’s share. The UAE, Bahrain, Oman and Pakistan were constant. Traditionally important contributors like Turkey and Kuwait were surprisingly modest contributors in 2020. But the UK returned to the top 10. As a whole, sub-Saharan Africa accounted for 5.5% of the submissions — all from IsDB affiliates International Islamic Trade Finance Corporation (ITFC) and Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). In 2020, we started with aspirations for Central Asia, but COVID-19 slowed the engagement and one expects the region to pick up in 2021 with the support of the ITFC.
Is green still a theme? Green has shifted into sustainability and transition deals. This can be seen in deals by Etihad Airways which issued ‘transition’ Sukuk as part of the airline’s plan to transition to carbon neutrality. Axiata entered the sustainability market through a syndication and included climate change strategies within the company’s benchmarking. Saudi Electricity Company issued Sukuk Ijarah with a sustainability perspective as well. On top of these were more standard green deals, particularly in solar.
But, have no doubt, hydrocarbons are still important. As many deals were green, refining and selling hydrocarbons featured significantly in deals by the ITFC in Africa or Standard Chartered Bank supporting liquefied natural gas (LNG) imports to Pakistan from Qatar. Hydrocarbon deals represented 71% of the energy submissions, green 18% and transition 5%. But by value, hydrocarbon deals represented 92% of the submissions, green 2% and transition 2%. The outlier was mixed deals with both hydrocarbon and green energy elements. These were 5% of the submissions and value. The message is that turning the lights on is urgent in poorer countries and the fastest route is via old energy.
The average green deal was only US$137.53 million compared with the average hydrocarbon deal at US$1.9 billion. Transition deals were substantial as well weighing in at US$1.45 billion on average. Deals with hydrocarbon and green components were also much larger than pure green deals. Mixed power projects averaged US$484.75 million.
In 2020, Tawarruq knew no bounds. Even the hybrid deals tend to have Tawarruq wings. By ‘hybrid’, we mean deals that use two or more Islamic methods of finance to achieve the financings. The significance of Tawarruq appears to be constricting product development in the two largest Islamic finance markets: Malaysia and Saudi Arabia. Its absence is generating innovation elsewhere. For newcomers to Islamic finance, like the Ministry of Finance in Egypt or the European Bank for Reconstruction and Development (EBRD), Tawarruq is often the easiest tool to apply.
For the first time, we see ‘insurance’ as the ICIEC submitted several deals. The distribution of currencies tells several stories. One third of all deals were in a currency other than the US dollar (US$), Malaysian ringgit (RM), Saudi riyal (SAR) or UAE dirham (AED). This means that new markets are developing and issuing in local currency. Euro (EUR)-denominated deals are still rare. The dynamic Malaysian market’s RM follows the US$ as the second most common currency. Saudi Arabia’s importance is masked by the fact that many important Saudi deals were executed in the US$ (Chart 4 is by currency distribution by deal, not deal values). Many US$ transactions are booked in the UAE. The role of the AED reflects the lively, but small domestic market. The dollar volume tracking through the UAE is a symbol of the UAE’s importance as a financial center.
Restructuring is a big theme in 2020, do we anticipate more in 2021? From Saudi Electricity Company’s world’s largest Islamic finance (SAR168 billion (US$44.72 billion)) deal to Gulf Marine Services, the market had plenty of do-overs. Oil and gas-linked companies in particular restructured as did Samalaju Industrial Port (Malaysia) and Garuda Indonesia, businesses in countries with high reliance on hydrocarbons.
These are legacies of recent challenges in oil markets. 2020 started with a significant disruption in the oil market and moved straight into multiple lockdowns.
There have been clear winners among certain businesses and sectors, and many losers. Can stimulus and bailout programs prevent a tsunami of business failures with the flood waters whirling in every segment of finance?
Size matters. The largest-ever Islamic finance deal was realized. Mega deals seem more common in 2020 despite the situation. Saudi Arabia was the leader with Saudi Electricity, Western Union– stc pay and more.
What will happen in 2021 with a new US president and COVID-19 prospectively under control? One expects a robust US economic stimulus. One hopes for more stable international politics. And one prays for the vaccination boom as we invent a new normal. We seem to be on the precipice of exciting times, yet we have much to worry over.
COMMODITY MURABAHAH/TAWARRUQ: MINISTRY OF FINANCE, ARAB REPUBLIC OF EGYPT’S US$510 MILLION SOVEREIGN DEAL | |
Size: | US$510 million |
Arrangers: | ABC Islamic Bank, Abu Dhabi Islamic Bank, Emirates NBD, Gulf International Bank, Al Dubai Islamic Bank; Sharjah Islamic Bank |
Bookrunners: | Mashreqbank, ABC Islamic Bank, Arab Banking Corporation, HSBC, Standard Chartered Bank, Sumitomo Mitsui Banking Corporation |
Legal counsels: | Helmy, Hamza & Partners and Baker McKenzie, Dubai for the issuer; Dentons for the arranger |
Rating: | Unrated syndication |
Guarantor: | Ministry of Finance |
Date: | August 2020 |
The finalists: AAOIFI’s Shariah Standard No 59 upset the financing market as it was adopted by the Central Bank of the UAE. The heavyweight UAE banks were obliged to change their deals and convince their partners in other jurisdictions to embrace the new AAOIFI rule. This was the case for Fawaz Abdulaziz Al Hokair & Co. Elsewhere, Tawarruq showed that it is the perfect icebreaker, allowing the Egyptian Ministry of Finance to entertain its first Islamic syndicated financing and Malaysia’s Cagamas to enter the sustainability market.
A 2019 IFN Deal of The Year finalist, Fawaz Abdulaziz Al Hokair & Co returned to the market for a revolving US$ and SAR facility of up to US$800 million. The deal was structured to comply with AAOIFI Shariah Standard No 59 designed to avoid the commonly used market practice of cashless rollovers in commodity Murabahah structures and to satisfy the Central Bankof the UAE’s requirements for all transactions signed by UAE banks from the 1st January 2020 to follow AAOIFI 59. This deal is believed to be the first deal in the market that was structured to comply with these regulations. A particular complexity is that not all members of the syndicate were obliged to comply as well as the required extra effort to lobby the various Shariah boards for a solution. Malaysia’s Cagamas launched its first ASEAN Sustainability SRI Sukuk. The deal is structured to support the following UN Sustainable Development Goals: No 7 Affordable and Clean Energy; No 11 Sustainable Cities and Communities; No 6 Clean Water and Sanitation; and No 8 Decent Work and Economic Growth. The particular focus is on affordable housing. The three-year deal was assigned a Tier 1 (highest) Social Benefit rating by RAM Sustainability. Part of Egypt’s first sovereign syndicated facility, this was the first Islamic finance facility for the Arab Republic of Egypt acting through the Ministry of Finance. The deal involves an innovative commodity Murabahah structure in compliance with AAOIFI Shariah Standard 59. Mohamed Maait, the minister of finance, commented: “We are proud of the appetite and interest received from regional and international banks in the syndication. It is a signal of Egypt’s successful reform program. Amidst challenging conditions, Egypt is reaping the fruit of consistent efforts towards enhancing its economy’s resilience. Egypt is continuously diversifying its funding sources by tapping regional as well as Islamic sources of finance.” Why the Arab Republic of Egypt was selected: The transaction was part of a US$2 billion commercial funding approved by the Majlis Ash Sha’ab. It is hoped that this is a door opener for future deals with the Arab Republic. Honorable mention: Fawaz Abdulaziz Al Hokair and Cagamas |
Shortlisted for Overall Deal of the Year 2020 | |
CORPORATE FINANCE: SAUDI ELECTRICITY COMPANY’S SAR168 BILLION RECAPITALIZATION EXERCISE | |
Size: | SAR168 billion (US$44.72 billion) |
Advisor: | HSBC Saudi Arabia |
Legal counsels: | Baker McKenzie with Abdulaziz Alajlan & Partners for the issuer; Clifford Chance and Abuhimed Alsheikh Alhagbani Law Firm in cooperation with Clifford Chance for the advisor |
Rating: | Unrated |
Date: | November 2020 |
Shariah advisor: | HSBC Saudi Arabia |
The finalists: 2020’s corporate finance submissions were highly diverse. Some deals were straight corporate finance. Our top three represent three trends in the market. Deals like Bank Pembangunan Malaysia represented a repositioning away from government support. Others like Saudi Electricity Company (SEC) reorganized a key utility’s finances, but coming more deeply in the government’s fold. Quite a large number of deals were either green or sustainability oriented. Etihad Airways joined this with their ‘transition’ representing the airline’s aspirations to move to carbon neutrality.
Bank Pembangunan Malaysia issued Sukuk Wakalah allowing for a substantive change in the bank’s capital structure and moving it closer to achieving fully-fledged Islamic development financial institution status. The deal reduces the government of Malaysia’s contingent liabilities by RM1.2 billion (US$297.07 million), while providing a proven and successful template that can be replicated by other government-guaranteed borrowers that also issue clean Sukuk. Reaching a diverse investor base, the deal converted RM1.2 billion in conventional liabilities to Islamic while achieving a low cost of capital and a longer duration. Etihad Airway’s Unity 1 Sukuk represents the first ‘transition’ and sustainability-linked Sukuk from the aviation sector. The transaction will support Etihad’s investments in next-generation aircraft and its commitments for carbon emissions reduction, which include achieving net zero carbon emissions by 2050, a 50% reduction in net emissions by 2035 and a 20% reduction in emissions intensity in the airline’s passenger fleet by 2025. The transaction was implemented in parallel with a tender offer in respect of Etihad’s outstanding Sukuk issuance. The SEC transaction is the world’s largest Islamic finance transaction to ever be executed. The deal positions the Kingdom of Saudi Arabia as a leading contender for leadership in Islamic finance. Clifford Chance advised SEC on the conversion and restructuring of its financial liabilities to the government into a SAR168 billion (US$44.72 billion) into a Shariah compliant subordinated financial ‘equity-like’ instrument or Mudarabah. This is part of wider electricity sector regulatory reforms in Saudi Arabia. SEC is the largest electricity company in the MENA region and plays a crucial role in helping meet the growing demand for electricity in Saudi Arabia. Following the conversion of liabilities, the financial agreement and reforms put SEC in a better financial position to meet its obligations and create a more sustainable capital structure for the SEC. The profit rate is payable once SEC distributes dividends to ordinary shares. This Mudarabah is classified under shareholders’ equity and considered non-dilutive to existing shareholders’ stakes. The Mudarabah is perpetual and subordinated. Why SEC was selected: We have those moments when we say that size does not matter. But it does with SEC’s recapitalization of its SAR168 billion of liabilities as ‘equity-like’ instruments or Mudarabah. The conversion includes government loans and SAR3.35 billion (US$829.31 million) of dividends owed to Saudi Aramco since SEC’s inception in 2017. The deal projects the Kingdom’s commitment to its Vision 2030 by assuring that SEC can achieve its objectives as well as the Kingdom’s support for Islamic finance. Honorable mention: Unity 1 and MBSB |
CROSS-BORDER: GATEWAY FUND 1’S ACQUISITION OF TIM HORTONS’S GCC FRANCHISES | |
Size: | US$37 million |
Investor: | Gateway Partners |
Legal counsels: | Al Tamimi Law Office for the seller; King & Spalding for the investor |
Financial advisor: | KPMG for the seller |
Shariah: | Not stated |
Date: | February 2020 |
The finalists: Cross-border nominations were equally diverse. Axiata not only had the first 30-year Sukuk in the telecoms sector, but it joined the sustainability club as well.
Axiata followed their May 2020 sustainability syndication with the largest airtime-based 30-year Sukuk of any telecoms business in Asia. The US$200 million and RM289 million (US$71.54 million) dual-tranche issuance is sustainability-linked. The deal aligns with UN Sustainability Development Goal No 7 Affordable and Clean Energy and Goal No 13 Climate Action. The internationally offered Sukuk are listed on Bursa Malaysia Securities and Singapore Exchange Securities, governed by English law. Batterjia is the Hunamia Group greenfield hospital program in Alexandria and Casablanca. Financiers included the International Finance Corporation (IFC) and the EBRD. The deal involved a Saudi Arabian sponsor, Egyptian and Moroccan affiliates, and delivery of new facilities during the COVID-19 pandemic. Structured as a Tawarruq financing, the commodity trades were managed by First Abu Dhabi Bank as the commodity agent. Gateway Fund 1 acquired 42.55% of the Tim Hortons franchises across every jurisdiction in the GCC from the Apparel Group. King & Spalding represented Gateway on all aspects of the transaction including from due diligence through negotiation, investment structuring and documentation to franchises agreements and restructuring. A particular complexity that King & Spalding had to address was the recent ban on UAE- and Saudi-domiciled groups owning businesses in Qatar. Why Gateway Fund 1 was selected: All GCC jurisdictions were involved, with the ultimate franchises agreements reaching North America. And this richly complex transaction involved the use of a Mudarabah to manage the investment process in a way that King & Spalding has been perfecting even among purely secular counterparties. Honorable mention: Batterjia/Humania and Axiata |
GREEN PROJECT: AXIATA GROUP’S US$800 MILLION MULTICURRENCY SUSTAINABILITY-LINKED SHARIAH FACILITIES | |
Size: | US$800 million |
Arrangers: | Maybank Islamic, MUFG Bank (Malaysia), OCBC Bank |
Legal counsel: | Rahmat Lim & Partners for the arrangers |
Rating: | ‘Baa2’ by Moody’s Investors Service/‘BBB+’ by S&P Global Ratings (obligor) |
Date: | May 2020 |
Shariah advisor: | OCBC Al-Amin Bank as the coordinator, sustainability structuring advisor and Shariah advisor |
Planet, people, profit: The volume of sustainable and green transactions keeps rising. But like Leader Energy, most are relatively small. Others are designed to address system-wide requirements like SEC and Axiata; these are not at all small. This is impact penny by penny, slow and steady.
Malaysia’s Leader Energy issued an ASEAN Green SRI Sukuk Wakalah facility. The proceeds of the RM260 million (US$64.36 million) deal are used to part-finance and/or part-reimburse the total development cost of two solar power projects in Kuala Muda. These projects undertaken by Leader Solar Energy and Leader Solar Energy II fit within the renewable energy category of eligible SRI projects identified by Securities Commission Malaysia’s SRI Sukuk Framework. The energy generated by the projects will be sold to Tenaga Nasional pursuant to the 21-year power purchase agreements. SEC issued US$650 million five-year and US$650 million 10-year Sukuk. These green Sukuk are based on the sale of a percentage interest in certain identified assets to the Sukukholders through an SPV. The assets are leased back. The proceeds are being applied to SEC’s net zero strategy. Axiata Group accessed US$800 million in first-of-its-kind syndicated multicurrency Shariah compliant sustainability-linked facilities. The transaction follows Axiata’s sustainability-linked financing and ESG conditions. This represents the company’s commitment to reduce carbon emissions and continued qualification as an FTSE4Good Bursa Malaysia Index constituent. The deal was closed during the first COVID-19 peak during the Movement Control Order imposed by the government of Malaysia. Why Axiata was selected: The deal managed complex legal issues, including the foreign exchange administration requirements of Bank Negara Malaysia, and the incorporation of sustainability-linked loan principles issued by the Loan Market Association and the Asia Pacific Loan Market Association in March 2019 into the financing had to be consistent with Shariah financing principles. Honorable mention: Leader Energy and SEC |
HYBRID: SHUAA ENERGY 3’S US$420 MILLION PROJECT FINANCE FACILITY | |
Size: | US$420 million |
Arrangers: | Abu Dhabi Islamic Bank, Arab Petroleum Investments Corporation, Emirates NBD Bank, Industrial and Commercial Bank of China, Dubai (DIFC) Branch, Natixis, Samba Financial Group, Standard Chartered Bank and Warba Bank |
Legal counsels: | Covington & Burling for the issuer; Norton Rose Fulbright for the arrangers |
Rating: | Unrated |
Date: | August 2020 |
The back story: The use of hybrids has become well entrenched in the Islamic finance market. Some of these are for asset-light companies blending an equity mode with a Tawarruq leg, or companies seeking flexibility and blending an Ijarah leg with a Tawarruq leg. Istisnah–Ijarah is now a reliable workhorse as demonstrated with ACWA Power’s two finalists. All figured across our 2020 nominations. PNC Investments used the longer-term flexible funding combination Murabahah–Ijarah. This category does not embrace the rating agency concept of hybrid in which a stand-alone instrument like Mudarabah, Musharakah or Wakalah is deemed to be like equity and debt at the same time.
Reed Smith advised PNC Investments in one of the UAE’s largest private real estate transactions in 2020. The transaction was complicated as it was part of the large restructuring of the joint venture (JV) arrangement that the client had with Meydan, a Dubai government entity. PNC’s share in the JV was bought out by Meydan. As the financier has considerable exposure to Meydan, management of the restructured obligations to flow to PNC was a serious obstacle. Ultimately, a blended Murabahah and Ijarah solution was delivered. The seeming omnipresence of Saudi Arabia’s ACWA Power assures that across all categories, the firm will be highly competitive. For instance, the firm’s Jazlah Water Desalination deal was also nominated by Abu Dhabi Islamic Bank and used the Istisnah–Ijarah financing tool for the Islamic leg. ACWA Power-sponsored SHUAA Energy 3 is a renewable energy project in Dubai with an extremely competitive tariff. The project involves the construction of a state-of-the-art 900 MW solar photovoltaic plant, using bifacial panels with tracking technology at a capital cost of circa US$564 million, and has been the focus of significant international interest, having demonstrated one of the lowest costs of electricity in the world of 1.69 US cents per kWh. The financing for the project is a limited recourse project financing with the senior debt provided by a number of international, regional and local banks along with a project recourse mezzanine tranche committed by a regional bank, structured as a circa 27-year soft mini-permanent financing with both conventional and Islamic tranches. In addition, the financing structure featured a set of equity bridge loans provided by local banks as well as the Dubai Electricity & Water Authority. The Islamic tranche is Istisnah–Ijarah. Why SHUAA Energy 3 was selected: The Mohammed Bin Rashid Al Maktoum Solar Park, a key pillar in fulfilling the Dubai Clean Energy Strategy 2050, is a public-private partnership with Shanghai Electric Group and ACWA Power representing the private sector. Although the Istisnah–Ijarah model is tried and true; this is one of the few cases involving a Chinese counterparty. Honorable mention: Jazlah Water Desalination Company and PNC Investment |
IJARAH: SEMARAK GIGIH’S RM244.3 MILLION SUKUK IJARAH | |
Size: | RM244.3 million (US$60.48 million) |
Arranger: | Hong Leong Investment Bank |
Legal counsel: | Adnan Sundra & Low for the arranger |
Rating: | Unrated |
Date: | February 2020 |
Shariah advisor: | Dr Aznan Hasan |
The finalists: The importance of Ijarah in the capital markets was well represented this year. Three distinct approaches were delivered among our finalists. The government of Sharjah applied this for the development of a liquidity support instrument. Talaat Moustafa Group gave evidence of the opportunities for real estate-based Sukuk in Egypt’s private sector. And for Semarak Gigih, it was the securitization of Ijarah assets.
The government of Sharjah issued a 12-month dirham-denominated paper across two tranches; the Sukuk formed part of the Sharjah Liquidity Support Mechanism. The program was devised in response to the Temporary Economic Support Scheme from the UAE’s central bank, requiring banks in the UAE to offer extensive forbearance on loan repayments to private sector customers. The Sukuk represented the first rated short-term local currency tradeable instrument in the UAE and were used as a security by the subscribing banks to access liquidity facilities made available by the central bank. The Sharjah Liquidity Support Mechanism consisted of short-term, local currency Sukuk issued by the government of Sharjah and offered to local banks, which would serve as high-quality eligible collateral for the central bank scheme, or any other repo operation in the market. The government also resolved to place part of the proceeds of the Sharjah Liquidity Support Mechanism back with the investing banks as deposits under lien at the same profit rate. Initial utilization was AED2 billion (US$544.47 million). Arab Company for Projects and Urban Development, a subsidiary of Talaat Moustafa Group Holding, issued the firm’s first project-related Sukuk Ijarah. Although modest in size, the Sukuk issuance is the largest Egyptian pound (EGP)-denominated debt issuance in the history of Egypt’s capital market. The issuing company and the Sukuk received an ‘A+’ rating from Middle East Rating & Investors Service. The rating incorporates the strong fundamentals of the company and its position as a leading real estate developer in Egypt. Semarak Gigih is an SPV debited for asset securitization of palm plantation assets. Each tranche is a securitization of a specific asset and as such secured by unique collateral. There will be no cross default among the tranche(s) under the Sukuk Ijarah Programme. However, there is a master security governing all assets which can only be enforced upon an event of default declared by Sukukholders of the most senior class. The deal is eligible for a guarantee/Kafalah facility from Danajamin Nasional although the first tranche was not guaranteed by a Kafalah or financial guarantee. The underlying leases are sale leaseback deals. The lessee has an option to purchase the assets against a sale undertaking from the issuer. The program has a number of flexible benefits beyond unlocking originator value. For instance, the program allows for acquisition of assets from different originators as well as different parties to operate the asset as a sublessee. The structure is limited recourse in nature whereby the Sukukholders will have no further claim against the issuer and/or the originator once the security(ies) has been exhausted for the relevant tranche. Why Semarak Gigih was selected: The deal expands the opportunity to invest in niche oil palm plantation-based financial assets. This structure brings together parties of different interests and allows parties that are asset-rich to monetize their assets and other parties with the expertise the opportunity to operate the assets and potentially to own the assets at the end of the Sukuk tenor. The different series with their respective tenors and pricings cater for investors with different risk appetites and return expectations. The flexibility of different types of pricing per Sukuk issuance could be targeted at different pools of investors such as financial institutions for floating rate Sukuk and institutional investors for fixed rate Sukuk. This widens the pool of investors for the subsector. Honorable mention: Sharjah Liquidity Support Mechanism and Arab Company for Project and Urban Development |
Shortlisted for Overall Deal of the Year 2020 | |
MOST INNOVATIVE: GOVERNMENT OF MALAYSIA’S RM666 MILLION SUKUK PRIHATIN | |
Size: | RM666 million (US$164.87 million) |
Arranger: | Maybank |
Legal counsel: | Not stated |
Rating: | Unrated |
Date: | September 2020 |
Shariah advisor: | Shariah committee of Bank Negara Malaysia |
The finalists: Innovation is surprisingly less than people claim. Much of it rests on Tawarruq structures. Our finalists for 2020 represent three of the largest Islamic finance markets. Alkhabeer Capital has pivoted from private markets to public markets. Its latest offering is an income fund that is the first of its kind in Saudi Arabia. Bank Islami Pakistan organized one of the first commercial paper style deals for Kot Addu Power. Never count Malaysia out — the government of Malaysia had issuance and substance innovations in its landmark Sukuk Prihatin.
In December 2020, Alkhabeer Capital launched its Diversified Income Fund. The Capital Market Authority-approved fund is listed. The initial offering raised SAR472.8 million (US$125.87 million) from 89,000 subscribers. The fund allows the manager to invest in Sukuk, trade finance and leasing, each up to 40%; income funds up to 25%; and cash or commodity Murabahah up to 5%. The December listing on Tadawul was a first for the Kingdom of Saudi Arabia. Kot Addu Power Company (KAPCO) issued Pakistan’s first rated, unsecured, privately placed short-term Sukuk structured on the Musharakah (Shirkat Ul Aqd) basis to meet working capital requirements of KAPCO. Pakistan’s leading asset management companies through 29 mutual funds invested in this Sukuk. The government of Malaysia issued its RM666 million Sukuk Prihatin. The transition is part of the government’s COVID-19 response. The funds were allocated to the Kumpulan Wang COVID-19 to finance the economic stimulus packages and recovery plan addressing the pandemic. Uses included enhancing connectivity in rural schools and financing microenterprises and medical expenditure related to COVID-19. The Sukuk have a first-ever donation feature embedded in their documentation. The Sukuk Prihatin facility was uniquely structured with ‘national solidarity’ as the main theme, where investors not only earn returns from the subscription but also have the option of donating the principal amount (in part or full) upon its two-year maturity. This donation contribution will be eligible for a special tax treatment, an incentive from the government to encourage contribution. Maybank was the sole primary distribution bank for the Sukuk Prihatin. Why the Sukuk Prihatin facility was selected: The deal was launched amid widespread restrictions on movement during the pandemic. The Sukuk Prihatin facility is the Malaysian government’s maiden digital Sukuk allowing subscriptions on internet/mobile banking platforms accessible across 27 participating banks, creating a new ecosystem in the market which may be further developed to allow other issuers to consider for their fundraising and to enhance retail investors’ reach. Honorable mention: Kot Addu Power Company and Alkhabeer Diversified Income Fund |
M&A, Equity & IPO: WESTERN UNION’S US$1.3 BILLION EQUITY INVESTMENT INTO STC PAY | |
Size: | US$1.3 billion |
Acquisition: | Western Union Company |
Legal counsels: | King & Spalding for Western Union; Freshfields for Saudi Telecoms; and CMS for stc pay |
Rating: | Unrated |
Date: | November 2020 |
The finalists: The 2020 M&A, Equity and IPO deals were highly diverse. The unexpected was represented with Oman Arab Bank (OAB)’s purchase of Alizz Islamic Bank (AIB). Size (large) and COVID-19 came into play with the MR DIY IPO. And the first Saudi unicorn was created with Western Union’s investment in stc pay.
OAB acquired Alizz Bank in two steps during July 2020. The OMR69 million (US$178.76 million) deal is the first known acquisition of an Islamic bank by a conventional bank. The more common route has been for conventional banks to set up their own windows or subsidiaries. Indeed, Oman Arab Bank already operated the Al Yusr window which has been merged into AIB. The transaction was the first takeover to be regulated by the new Oman Public Takeover Regulations and involved AIB becoming a wholly-owned Islamic banking subsidiary of OAB, a delisting of AIB from the Muscat Securities Market (MSM) and a subsequent listing of OAB on the MSM. One wonders if this is the future of consolidation in some countries with dual banking systems. In a sign of the pandemic, MR DIY Group showed that certain businesses can buck the trend. The IPO listed the company as a Shariah compliant counter on Bursa Malaysia. With a market valuation exceeding RM10 billion (US$2.48 billion), the company is more valuable than most banks, and exceeds the combined value of Pos Malaysia and Malaysia Airports Holdings. The proceeds were applied to debt reduction, preparing MR DIY for recovery post-COVID-19. Western Union Company entered into an agreement to subscribe for new shares for a stake of up to 15% in stc’s digital secure wallet and financial technology services arm, stc pay. stc pay required that all transactional documents be Shariah compliant. The US$1.3 billion deal create the first Saudi Arabian unicorn: the third in the Middle East, and the first in the Middle East for fintechs. Western Union is the world’s largest money transfer firm. stc pay provides digital and financial services to individuals and companies and launched a digital wallet mobile application in 2018. It currently has more than 4.5 million users. Its parent, stc, is listed on Tadawul and its majority owner is the Public Investment Fund, the sovereign wealth fund of Saudi Arabia, and stc is the leading Saudi telecommunications services provider. Why stc pay was selected: The matter involved regulatory approvals from Saudi Central Bank, the Saudi Competition Authority, the Ministry of Investment and the Ministry of Commerce. The deal incorporated unusual features to ensure that Western Union could enforce a put option against a prominent Saudi Arabian company. During a challenging year of declining foreign investment, the structuring and regulatory approvals obtained gave Western Union the confidence to make an investment of US$200 million to help create Saudi Arabia’s first unicorn, a landmark transaction in attracting substantial foreign investment outside of the petroleum sector. Honorable mention: OAB and MR DIY |
Shortlisted for Overall Deal of the Year 2020 | |
MUDARABAH: DP WORLD SALAAM’S US$1.5 BILLION PERPETUAL SUKUK | |
Size: | US$1.5 billion |
Arrangers: | Abu Dhabi Islamic Bank, Citigroup Global Markets, Commercial Bank of Dubai, Crédit Agricole CIB, Deutsche Bank (London Branch), Dubai Islamic Bank, Emirates NBD Bank, First Abu Dhabi Bank, HSBC Bank, JPMorgan Securities, Samba Financial Group, Standard Chartered Bank, The Bank of Nova Scotia |
Bookrunners: | Citigroup Global Markets; Deutsche Bank, London Branch; and JPMorgan Securities as joint global coordinators
Citigroup Global Markets; Crédit Agricole Corporate and Investment Bank; Deutsche Bank, London Branch; Dubai Islamic Bank; Emirates NBD Bank; First Abu Dhabi Bank; HSBC Bank; JPMorgan Securities; Samba Financial Group; Standard Chartered Bank; and The Bank of Nova Scotia as joint lead managers |
Legal counsels: | Clifford Chance and Maples & Calder for the issuer; White & Case for the arrangers |
Rating: | ‘Ba2’ by Moody’s Investors Service and ‘BB’ by Fitch Ratings |
Date: | July 2020 |
Shariah advisors: | Shariah Advisory Board of Citi Islamic Investment Bank, the Fatwa and Shariah Supervisory Board of Dubai Islamic Bank and the Shariah Committee of Dar Al Sharia Islamic Finance Consultancy, the Internal Shariah Supervision Committee of First Abu Dhabi Bank, the Internal Shariah Supervision Committee of HSBC Bank Middle East, the Shariah advisors of JPMorgan Securities and the Global Shariah Supervisory Committee of Standard Chartered Bank |
The finalists: Mudarabah has become more widely used. King & Spalding is perfecting the adoption of Mudarabah across markets. The optimal solution for the SEC deal was Mudarabah. And like so many, DP World’s best option for a perpetual Sukuk was Mudarabah.
As part of the complex repositioning of SEC, the Ministry of Finance of the Kingdom of Saudi Arabia exchanged SEC’s legacy obligations (government payables and soft loans) for a Mudarabah-based perpetual subordinated instrument. The Mudarabah was classified under shareholders’ equity and considered non-dilutive to existing shareholders’ stakes of SEC. Gateway Fund 1 acquired 42.55% of the Tim Hortons GCC franchises via a Mudarabah funding. The Mudarabah allowed Gateway to navigate a number of jurisdictional challenges while evangelizing Mudarabah to new users. DP World Salaam as the issuer raised US$1.5 billion for DP World (new DP World) to apply to general corporate purposes, including financing of payment obligations entered into in connection with the acquisition of DP World’s shares by Port and Free Zone World FZE. The deal is part of DP World’s privatization strategy. This transaction is: 1. the first corporate hybrid Sukuk to have an international rating The proposed corporate hybrid transaction is part of DP World’s effort to deleverage the company to circa 4x net debt/ earnings before interest, taxes, depreciation and amortization (EBITDA) over the next three years and to strengthen the capital structure of the company as the corporate hybrid is accounted for as equity under the International Financial Reporting Standards (IFRSs) and receives 50% equity credit from the rating agencies. This transaction also marks a successful return to the debt capital markets for DP World after the announcement of its intention to delist its shares and return the company to a 100%, indirect ownership by the government of Dubai. Why DP World Salaam was selected: The Sukuk were issued under a Mudarabah structure, and represent DP World’s inaugural issuance of deeply subordinated perpetual debt of any form. Outside of Malaysia, this represents a rare issuance of subordinated corporate Sukuk. Honorable mention: SEC and Gateway Fund 1 |
MUSHARAKAH: AMRELI STEEL’S US$3.93 MILLION DIMINISHING MUSHARAKAH FACILITY | |
Size: | US$3.93 million |
Arranger: | Faysal Bank |
Legal counsel: | Ali Khan Law Associates for the issuer |
Date: | May 2020 |
Shariah advisor: | Faysal Bank Pakistan |
The finalists: Contestants for Musharakah were highly diversified and included ‘running Musharakah’, ‘constant Musharakah’ and ‘diminishing Musharakah’ deals. Each concept is suitable for different situations. The running Musharakah is best for short-term working capital. It is part of the constant Musharakah family which finances operations for a significant period. Diminishing Musharakah is ideal for asset-based financing. The former and Shirkat Ul Aqd are contractual partnerships, while the latter is a partnership in property or a form of co-ownership.
Kot Addu Power Company (Pakistan) issued short-term Sukuk based on the running Musharakah concept. The PKR5 billion (US$31.14 million) deal was well received by investors in Pakistan. The concept of running Musharakah reassesses the profit-sharing periodically for short duration financings over an agreed period.. Sime Darby issued an ASEAN Sustainability SRI Sukuk Musharakah facility. The proceeds are governed by the company’s Sustainability Sukuk Framework and the accompanying guidelines or frameworks or standards, as amended from time to time under which such ASEAN Sustainability SRI Sukuk Musharakah are issued. The transition Sukuk represent the first sustainability Sukuk globally based on a constant Musharakah. Faysal Bank arranged a secured diminishing Musharakah funding for Amreli Steel Company. This finances the construction of a 4 MW solar plant at Amreli’s mill. The solar plant will reduce the company’s energy costs. This transaction qualified under the State Bank of Pakistan’s Renewable Energy Scheme ‘IFRE’, which provides the company cheaper financing at concessionary rates thereby reducing risks for Musharakah investors. The deal is also covered under the US AID guarantee program for 50% of the facility’s capital. Why Amreli Steel was selected: This deal packs in three features: co-ownership of power-generating solar and other assets; the implementation of green energy; and qualifying an Islamic finance deal for the US AID credit guarantee scheme. Honorable mention: Sime Darby and Kot Addu Power Company |
Shortlisted for Overall Deal of the Year 2020 | |
PERPETUAL: DP WORLD SALAAM’S US$1.5 BILLION PERPETUAL SUKUK | |
Size: | US$1.5 billion |
Arrangers: | Abu Dhabi Islamic Bank, Citigroup Global Markets, Commercial Bank of Dubai, Crédit Agricole CIB, Deutsche Bank (London Branch), Dubai Islamic Bank, Emirates NBD Bank, First Abu Dhabi Bank, HSBC Bank, JPMorgan Securities, Samba Financial Group, Standard Chartered Bank, The Bank of Nova Scotia |
Bookrunners: | Citigroup Global Markets; Deutsche Bank, London Branch; and JPMorgan Securities as joint global coordinators
Citigroup Global Markets; Crédit Agricole Corporate and Investment Bank; Deutsche Bank, London Branch; Dubai Islamic Bank; Emirates NBD Bank; First Abu Dhabi Bank; HSBC Bank; JPMorgan Securities; Samba Financial Group; Standard Chartered Bank; and The Bank of Nova Scotia as joint lead managers |
Legal counsels: | Clifford Chance and Maples & Calder for the issuer; White & Case for the arrangers |
Rating: | ‘Ba2’ by Moody’s Investors Service and ‘BB’ by Fitch Ratings |
Date: | July 2020 |
Shariah advisors: | Shariah Advisory Board of Citi Islamic Investment Bank, the Fatwa and Shariah Supervisory Board of Dubai Islamic Bank and the Shariah Committee of Dar Al Sharia Islamic Finance Consultancy, the Internal Shariah Supervision Committee of First Abu Dhabi Bank, the Internal Shariah Supervision Committee of HSBC Bank Middle East, the Shariah advisors of JPMorgan Securities and the Global Shariah Supervisory Committee of Standard Chartered Bank |
Forever finalists: The perpetual market has divided into banking regulatory deals and corporate deals. Each has its unique story. The bank deals tend to be a common structure. The corporate deals delivered by Dialog (Malaysia), SEC and DP World (UAE) come with unique back stories that led to the perpetual route.
Dialog Group launched a program of non-callable (seven years) Sukuk allowing the flexibility to issue senior Sukuk Wakalah and/or perpetual Sukuk Wakalah (collectively, Sukuk Wakalah). The perpetual issuance arranged by AmInvestment Bank and advised by Zaid Ibrahim & Co for the issuer and Adnan Sundra & Low for AmInvestment was on the 16th November 2020 for RM500 million (US$123.78 million). The Ministry of Finance of the Kingdom of Saudi Arabia acquired a Mudarabah instrument considered non-dilutive to existing shareholders’ stakes of SEC. The perpetual Mudarabah represents about 33.4% of SEC’s total assets. This restructuring strengthened SEC’s financial position and its ability to provide its services with higher levels of efficiency and reliability. It also enabled SEC to fulfill all of its financial obligations including fuel payments, purchased power payments as well as distributing dividends to shareholders. DP World Salaam’s transaction also marks a successful return to the debt capital markets for DP World after the announcement of its intention to delist its shares and return the company to a 100% indirect ownership by the government of Dubai. This corporate hybrid is part of DP World’s efforts to deleverage the company to circa 4x net debt/EBITDA over the next three years and to strengthen the capital structure of the company. The corporate hybrid is accounted for as equity under the IFRSs and receives 50% equity credit from the rating agencies. Why DP World Salaam was selected: This deeply subordinated perpetual Mudarabah represents the: Honorable mention: Dialog Group, SEC and Ministry of Finance Saudi Arabia |
PROJECT & INFRASTRUCTURE FINANCE: JAZLAH WATER DESALINATION CO’S US$481 MILLION FINANCING FACILITIES | |
Size: | US$481 million: US$320 million Wakalah-Ijarah or Istisnah–Ijarah
SAR95 million working capital US$164 million equity bridge US$290 million hedging |
Arrangers: | Abu Dhabi Islamic Bank, Al Rajhi Banking and Investment Corporation, Mizuho Bank and Riyad Bank |
Legal counsels: | Covington & Burling for the issuer; Hogan Lovells for the arrangers |
Rating: | Unrated syndication |
Date: | September 2020 |
The finalists: Infrastructure and project deals continue to center on energy and water across our submissions. In 2020, there were fewer submissions for transport insfrastructure. Pengerang LNG (Two) represented the lead Malaysian deal. With SHC Capital on its heels, these showed the capacity of Malaysia’s capital market to deliver on long-term core projects. ACWA Power raised the GCC flag with its Jubail desalination project.
Pengerang LNG (Two) is an RM1.7 billion (US$420.84 million) project financing. AmInvest, CIMB Investment Bank, Maybank Investment Bank and RHB Investment Bank structured the Sukuk Murabahah (Tawarruq ) notes program. The deal represents the largest oil and gas issuance since 2018, and the first by PETRONAS since 2014. SHC Capital is an RM80 million (US$19.8 million) project financing arranged by Kenanga Investment Bank as Sukuk issued under Wakalah Bil Istithmar and Tawarruq structures. The proceeds finance a district cooling pan in the Pagoh Education Hub, Johor. The sponsor provides the financing onward via Mudarabah. The Jubail-3A IWP project was awarded to the ACWA Power consortium including Gulf Investment Corporation and Al Bawani Water and Power Company. Jubail-3A IWP will utilize reverse osmosis technology to yield a capacity of 600,000 cubic meters a day. The engineering, procurement and construction (EPC) contract for the project was awarded to a consortium of SEPCOIII, Power China and Abengoa. The operations and maintenance agreement was signed with an affiliate of First National Operations & Maintenance Co. The plant is located in Jubail, Saudi Arabia. This is a multisource non-recourse syndicated financing for the Jazlah Water Desalination Co (AWCA Power as sponsor). The project is the fourth seawater reverse osmosis desalination project to be awarded in the Kingdom of Saudi Arabia over the last three years, as part of the largest public–private partnership desalinated water procurement program in the world. Financings include Wakalah–Ijarah, Istisnah–Ijarah and Tawarruq. In addition, the lead banks organized profit rate swaps. Why Jazlah Water Desalination Co was selected: The financial close was achieved with an extraordinary diverse and robust set of Islamic finance solutions provided by four GCC financing institutions which include (i) US$ senior facilities (accounting for more than 67% of total project debt requirement), (ii) SAR working capital facility, (iii) US$ equity bridge loan facilities, and (iv) LIBOR hedging agreements. Honorable mention: Pengerang LNG (Two) and SHC Capital |
REAL ESTATE: SIME DARBY’S RM800 MILLION ASEAN SUSTAINABILITY SRI SUKUK MUSHARAKAH ISSUANCE | |
Size: | RM800 million (US$198.04 million) |
Arrangers: | CIMB Investment Bank, Maybank Investment Bank, Public Investment Bank |
Legal counsel: | Zul Rafique & Partners for the arrangers |
Rating: | ‘AA+’ by Malaysian Rating Corporation (MARC) |
Date: | December 2020 |
Shariah advisor: | Maybank Islamic |
The finalists: In general, this is not expected to be a good time for real estate. Not anywhere. Investors are unsure if working from home is permanent and whether or not operators can pivot effectively. Nonetheless, across silos, real estate was prominent. Alkhabeer REIT demonstrated the positives. Talaat Mustafa Group’s Arab Company for Projects and Urban Development opened the Egyptian real estate capital market. And Sime Darby prepared for the future.
Amid this dismal environment, Alkhabeer REIT held an additional offer of 36.5 million additional shares and increased the REIT’s equity by SAR365.3 million (US$97.25 million). A September listing meant that all of the hard work was done over the summer during COVID-19. This substantial achievement led to a SAR722.8 million (US$192.42 million) increase in assets to SAR1.7 billion (US$452.57 million). The Arab Company for Projects and Urban Development entered a sale leaseback agreement with the issuer on Madinaty Open Air Mall. EFG Hermes acted as the sole financial advisor, coordinator, sole promoter and underwriter of the deal. EFG Hermes also acted as the issuing company and built on several recent successes with the Financial Regulatory Authority relating to capital market deals like short-term Sukuk. The investment grade transaction is a role model for the dynamic Egyptian real estate market and an opportunity for investors. Sime Darby’s program finances future investments, capital expenditure, the group’s working capital requirements, general corporate purposes and, if required, to refinance debt obligations of the group. These payments, however, are to meet the criteria as set out in Sime Darby’s Sustainability Sukuk Framework and the accompanying guidelines or frameworks or standards, as amended from time to time under which such ASEAN Sustainability SRI Sukuk Musharakah are issued including: 1. the Sustainable and Responsible Investment Sukuk Framework under the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework issued by Securities Commission Malaysia on the 9th March 2015 and revised on the 12th November 2020 (as amended from time to time) Why Sime Darby was selected: It’s not just that this deal was executed during the height of COVID-19 — every deal this year overcame COVID-19 related issues — but it also had the following achievements: 1. First sustainability Sukuk globally based on the Shariah principle of Musharakah Honorable mention: PNC Investments and Elite Commercial REIT |
REGULATORY: KT AT ONE CO’S US$250 MILLION TIER 1 ISSUANCES | |
Issuer: | KT AT One Company |
Size: | US$250 million in two issuances |
Arranger: | KFH Capital |
Legal counsels: | Akin Gump Strauss Hauer & Feld and Mutlu Avukatlik Ortakligi for the issuer; Clifford Chance and CIFTCI Law Firm for the arranger |
Rating: | Unrated syndication |
Date: | September 2020 |
Shariah advisors: | KFH Capital and Kuveyt Turk |
The finalists: The regulatory capital story usually stops at Tier 1 or Tier 2 Sukuk. This year, we have both: Tier 1 from Kuveyt Turk Katilim Bankasi and Tier 2 in Riyad Bank’s return to the capital markets. An addition to our story is Dar Al Takaful’s equity acquisition of the Noor Takaful companies.
Dar Al Takaful acquired Noor Takaful General and Noor Takaful Family from Noor Bank and Noor Investment Group. Part of a broader trend of consolidations in the UAE insurance industry, the deal required a number of special exemptions from the Insurance Authority and the UAE Securities and Commodities Authority, including an exemption from the requirement for an insurance company to be listed (the target companies were bought as wholly-owned subsidiaries of a listed company, with the target companies remaining unlisted at closing). Baker McKenzie advised Dar Al Takaful. Returning to the international markets after 14 years, Riyad Bank raised US$1.5 billion in Tier 2 certificates. The debut issue of the bank’s inaugural program was achieved just before the pandemic’s impact on markets was felt. Listed on the International Securities Market of the London Stock Exchange, the deal was the first public issuance of Tier 2 securities from Saudi Arabia. The deal is a hybrid Wakalah/Tawarruq structure. KT AT One Co, with Kuveyt Turk Katilim Bankasi as the obligor, was advised by Akin Gump on the issuance of US$50 million perpetual Tier 1 capital certificates, listed on the Global Exchange Market of Euronext Dublin. The deal was launched in particularly challenging market conditions. Despite significant macroeconomic headwinds in the capital markets in Turkey and elsewhere, it was one of only a small handful of successfully issued regulatory capital issuances out of Turkey. This is an important regulatory capital-raising transaction for Kuveyt Turk as the Basel III compliant Tier 1 capital certificates will raise the capital adequacy ratio of the bank allowing for stronger growth. A further issuance was to complete the acquisition of the majority holding by Kuveyt Turk in Neova Sigorta, a Turkish Takaful company. Why KT AT One Co was selected: The transaction was also a landmark transaction in that it was structured in a manner where Kuveyt Turk was able to book the transaction as a US$ transaction (as opposed to a Turkish lira equity transaction — as has been the case for the majority of the previous Tier 1 Sukuk issuances out of Turkey). This novel approach permitted Kuveyt Turk to mitigate the currency volatility on its financial statements. Honorable mention: Riyad Bank and Dar Al Takaful |